World Gold Council says India’s gold demand was what supported the global market in Q1 2017, but where in India does the gold go to?

The latest report from the World Gold Council says that gold demand from India was what supported global gold demand in the first quarter of 2017. Indian purchases of gold jewellery in the first quarter of 2017 accounted for a little over a fifth of world jewellery demand. That is completely out of proportion to India’s share of world gross domestic product (GDP), which is around 3% or so, in current US dollars. During Q1, 2017, India’s demand for gold jewellery was 92.3 tonnes, compared to 22.9 tonnes for the US. Investment demand for gold in the form of bars and coins was 31.2 tonnes in Q1 2017, compared to 16.2 tonnes for the US.

India’s hunger for gold is not surprising—people have been complaining about the “drain of gold” into India for ages, starting with Pliny the Elder, the Roman writer of the 1st century AD. But where in India does the gold go to? And who are the people who buy all this gold jewellery?

The short answer to the first question is, in one word: Kerala. For a longer answer, turn to Chart 1, which shows the monthly per capita expenditure on gold ornaments among the Indian states. The data have been taken from the National Sample Survey Office (NSSO)’s survey on Household Consumption of Various Goods and Services in India, 2011-12. Only data from the states have been taken here and Union territories have not been included.

The first thing that catches the eye in the chart is how different Kerala is from the rest of India in terms of spending on gold ornaments. For instance, not only does rural Kerala top the rankings for spending on gold ornaments, its per capita spending is six times higher than the state that ranks number 2—Goa. Indeed, rural Kerala’s per capita spending on gold ornaments is far ahead of the total per capita spending of all the other six top states by gold consumption shown in the chart.

Urban India, being richer, spends more on gold ornaments than rural areas. Nevertheless, here too urban Kerala ranks first by a mile among the states. To be sure, Kerala has relatively high per capita income, but it’s certainly not so different from other Indian states as the gold consumption data suggests. Cultural factors must be behind its status as an outlier. It is no wonder then that the Kerala chief minister wants a low goods and services tax (GST) for gold.

At the other extreme are the states with the lowest per capita expenditure on gold ornaments. As the chart shows, the north-eastern states figure prominently in this list—again the reason is likely to be cultural factors rather than poverty. It’s likely though that poverty is the factor behind states like Bihar and Jharkhand having low per capita gold consumption.

What about the second question—who buys all this gold? Well, the rather obvious answer is it’s the rich. Chart 2 has the details. The population is divided into 12 fractiles depending on their consumption. Fractile 12 is the top 5% in terms of consumption, fractile 11 the next 5%, fractile 10 the next 10%, fractile 9 the next lower 10% and so on, with fractile 1 being the lowest 5%. In other words, the fractile classes used are the percentile classes 0-5%, 5-10%, 10-20%, 20-30%, 30-40%, ..., 70-80%, 80-90%, 90-95%, and 95-100%. These fractiles are taken separately for rural and urban India.

As the chart shows, the richest 5% in rural India spend 6.2 times more on gold ornaments than the next 5%. In urban India, this multiple is 3.9 times. Sure, even the poor buy some gold jewellery. But note how much more the top 5% spend on gold ornaments compared to the middle percentiles. Clearly, the people who will benefit the most from a low goods and services tax (GST) rate on gold will be the rich.